Swing Trading: Definition and the Pros and Cons for Investors

Swing trading has been one of the most popular trading techniques, whereby both traders and investors seek to benefit from the short-term trading moves in the market. Generally, swing trading positions are held over a period lasting several days up to around a week. 

Mostly, the traders get the scrip for trading as identified through technical analysis. In fact to grab such a great opportunity, a trader must be fast in action in order to give a good chance of making a profit in a short period of time.  

Swing traders try to take advantage of recent lows and highs in the buying and selling of stocks in a bigger overall trend. They are exposed to the uncertainty of overnight risks, which sometimes trigger huge price movements. They can look at their positions at intervals and act when critical points are touched.

Advantages of Swing Trading 

Short-term Trading : A set period of time from two days to few weeks is kept to hold swing trading positions. There are some techniques or trading patterns on which such trades are made. This places a big advantage on the trader's side because he will not always be sitting in front of the screen, cutting the noise. Another plus of swing trading is the short duration of a trade; most traders take the entry when the stock price is either preparing for a breakout or reversal. 

Avoid Overtrading: Swing trading is attained by traders over-trading. In swing trading, one gets an opportunity to maintain a high-risk reward ratio for trade. The intra-day price fluctuation does not affect the swing trading positions, thereby avoiding unnecessary adjustments. This could help traders avoid overtrading to maximize the returns and further cut down on brokerage cost, having a positive impact on the P/L statement in the long term. 

Moderate-Risk Trading: The degree of risk involved in swing trading is negligible in comparison with intraday trading, which is the distinct reason investors have a preference for swing trading over others. The other reason many people regard swing trading to be very beneficial is that it offers a tidy balance between risk and reward. This approach to realising small gains over the space of days to weeks is manifested as a means of taking advantage of market movements in a less exacting and less risky approach than day trading. It is for this reason that, being situated between the two opposite ends, this methodology is of moderate risk, having the interest of one who cannot stand either of the two or one who prefers a more relaxed pace of trading, giving one ample time to stare at charts and make the right choices. 

Swing trading is, therefore, less stressful in that positions can be held for a couple of days, and one does not have to be glued to the market always, hence may be the most ideal way for one who is seeking relatively consistent and reasonable returns which one merely cannot ignore. 

Low Leverage: Most swing trading is done with low leverage, and this is what makes the trade advantageous most of the time. This is because when using low leverage, traders minimise the risks of gaining huge losses. This is because they manage to keep a somewhat conservative style that protects capital, considering that with smaller position sizes, any move in an unfavourable price will affect them less.

Another advantage of low leverage is the ability it gives to traders to hold through market fluctuations without worrying about margin calls. Specifically, since swing trading involves holding through interventions over the course of several days and weeks, this form of risk management is critical for sustainable long-term profitability with minimal chances of suffering catastrophic losses.

Disadvantages of Swing Trading

Impact of External Factors - Economic reports, geopolitical developments, or unexpected news are all among the external events that can greatly affect swing trading. This can create a swift fluctuation of prices, disturbing the existing trend that was going on before, and eventually leading to unexpected gains or losses.

Since they run their positions for many days or even weeks, this nature of trading makes swing traders vulnerable to these market transitions since their ability to adapt becomes really slow. To hedge against these risks, a trader would usually be looking after the news and putting protective measures through a stop-loss order. However, the timing of the outside events is hard to predict, and one should be prepared to change one's strategy at any moment.

Long-term opportunities that are missed - That said, it does capture short- to medium-term price swings and can often lead to missed opportunities in multibagger stocks. Because swing traders have shorter holding periods, measured in days to weeks, they quite easily sell off a stock before it moves on to grow strongly.

This is the approach that is believed and acted upon by the people to be for more near-at-hand benefits, but that sometimes denies the trader the ability to corner the true value of a stock in terms of its long-term potential. In general, multibagger stocks require reasonable patience and a definitely longer time frame within which to derive their true value—something opposite to the much quicker churn philosophy in swing trading. Thus, in this respect, swing traders miss out on a lot of value addition accruing by holding onto these fast-growing valuable entity stocks in the long term.

Many short-term traders would prefer using swing trading, since this method is one of the few that holds some big advantages, which can make traders profitable at the end of the long term. However, external events can overnight shake the swing trading positions, which are a big risk for short-term traders.

Conclusion

Swing trading is preferable for many short term traders as it has few big advantages which can make the traders profitable in the long term. However, external events can overnight shake the swing trading positions which is a big risk for short term traders. 

Also Read: 

• Swing Trading Strategies

• The Art of Swing Trading in the Indian Stock Market

• Best Technical Indicators for Swing Trading

• How to Select Stocks for Swing Trading?